Chesapeake Energy, a pioneer of the American shale revolution, declared bankruptcy on Sunday, the biggest US producer to have succumbed in an oil-price crash that is ravaging the country’s energy sector.
After skipping interest payments this month, and with bonds maturing this year that were last trading for only about 5 cents on the dollar, a Chapter 11 filing was expected sooner rather than later.
But the bankruptcy of a company that led the shale breakthrough more than a decade ago, helping the US become the world’s biggest oil and gas producer, will nonetheless send shockwaves through a sector enduring its worst crash in decades.
“We are fundamentally resetting Chesapeake’s capital structure and business to address our legacy financial weaknesses and capitalise on our substantial operational strengths,” said Doug Lawler, Chesapeake’s chief executive.
The company said it had gained agreement with the majority of its creditors to eliminate $7bn of debt and had secured $925m of debtor-in-possession financing to continue operating through the bankruptcy.
Chesapeake’s management, which recently shared a “retention bonus” of $25m that was announced just days before the company warned investors it may seek Chapter 11 protection, is expected to remain in place during the restructuring.
The company has filed for Chapter 11 protection in the US Bankruptcy Court for the Southern District of Texas. As part of the restructuring, lenders have agreed in principle to provide $2.5bn in financing on its exit from bankruptcy, made up of a $1.75bn revolving credit facility and a $750m term loan. Lenders will also backstop a $600m rights offer on its bankruptcy exit.
Chesapeake’s advisers in the bankruptcy include law firm Kirkland & Ellis, Alvarez & Marsal as restructuring adviser, and investment banks Rothschild & Co and Intrepid Financial Partners.
Analysts said the company’s Chapter 11 filing was likely to open the floodgates for others in a shale patch that was already weakening this year even before the worst oil price crash in decades hit the sector.
By the end of May, 18 US exploration and production companies had filed for bankruptcy this year, according to law firm Haynes and Boone.
Despite an oil market rally from record low prices in April — when the US benchmark briefly traded below zero — US oil is still trading beneath the $45 or more that some weaker producers need to stay afloat.
“The sector is not dead, and the US will benefit for years to come from the low-cost resource that Chesapeake helped find,” said Andrew Gillick, a managing director at RS Energy Group, a consultancy.
“But the excitement around shale has officially died today with the Chesapeake filing.”
Founded in 1989, Chesapeake went public in 1993 but it was not until the 2000s that the company’s moment arrived, as hydraulic fracturing and horizontal drilling unleashed vast new reserves of trapped shale gas from Texas to Pennsylvania.
Under its charismatic founder and then-chief executive Aubrey McClendon, Chesapeake amassed a huge land position across US shale basins, committing to drill thousands of wells.
It became the US’s second-biggest natural gas producer and the drilling mania helped drive a shale revolution that would within a decade make the US the world’s largest oil and producer.
Chesapeake’s market worth reached more than $35bn in 2008. McClendon used his wealth — he was for a time the highest paid chief executive in the US — and the company’s to transform Oklahoma City, Chesapeake’s home town. He helped buy an NBA team and launched property redevelopments close to the company’s state-of-the-art campus.
McClendon died in 2016, a day after his indictment on charges of rigging bids for drilling rights.
On Friday, the company’s market capitalisation was just $116m.
The huge debts McClendon amassed to build his natural gas empire hamstrung Mr Lawler’s efforts to transform the company he took over in 2013. Asset sales halved liabilities to $12bn by the first quarter of this year — but the company’s total assets were by then worth just $8bn.
Chesapeake was unable to spend consistently within cash flow and, in 2018, a costly effort to produce more oil, instead of gas, with an acquisition in Texas and drilling campaign in Wyoming, proved ill timed as crude prices drifted lower last year and crashed this spring.
“Chesapeake looks like many of the other companies that followed in its footsteps — it took on far too much debt and never generated free cash flow,” said John Thieroff, a senior analyst at Moody’s Investors Service.
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Chesapeake produced almost 500,000 barrels of oil equivalent in the first quarter, from assets in the Marcellus shale, in Appalachian Basin, as well as in Texas and Wyoming.
But years of weak natural gas prices, partly caused by the supply surge Chesapeake helped engineer, and the ever-present headwind of hefty interest payments left Chesapeake vulnerable as the pandemic and price war shattered the energy market this year.
Analysts say more bankruptcies are inevitable, even if oil and gas prices edge higher in the coming weeks. The crash has done too much damage to already weak companies, and more debts are coming due.
“There will no doubt be others to file for bankruptcy in the near term as the sector looks to get out from under the copious amount of debt it took on during the boom,” said Mr Thieroff.
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